Natural gas trading metrics have traditionally focused upon things like weather, seasonality, storage and demand. While such things are certainly important and often determinative in the short run, larger macroeconomic and global issues have proven just as important if not more so in the long run. At present, when viewing only the former, gas prices seem bearish. However, when considering the latter, another picture emerges.

Storage capacity remains high, especially when measured against the five year average.  Although the Baker Hughes rig count had declined markedly in 2009, drilling, especially horizontal has increased. With the US remaining locked in a recession and with current government policy hardly being friendly to hydrocarbon usage or production, it is easy to understand why many remain unfriendly towards the market end of natural gas. The substantial impact of increased supply from unconventional sources, especially the newer shale plays, only furthers conventional thought that 2010 may well yield continued pricing weakness. New factors rather than traditional measures of late become increasingly influential towards the future, especially when one looks beyond historic short term and seasonal volatility.

In the last several months, when measuring the 10-year Treasury bond against the 2-year Treasury note, the longer end of the yield curve has steadily steepened. There has rarely been a recession when such a steepening of the yield curve has not signaled a recovery within a year. One might thereby conclude that the US GDP will probably return to at least modest growth by the end of this year. Now, it may well be that this signals a global recovery, especially in Asia.  Our own recovery may prove tepid and relatively jobless. Nevertheless, even slow growth in the US relative to the emerging regions would serve to significantly increase global energy demand.

China has for the last several years spent hundreds of billions of dollars quietly buying up oil and gas reserves. The most recent purchase was close to our own border. They purchased copious amounts of Canadian oil sands. Meanwhile US policy has been to discourage both the use and development of hydrocarbons in favor of alternative forms of energy. The result of this will be when a likely global recovery resumes in the second half of the year, oil supply will become increasingly tight. While not as strong as it once was, natural gas continues to trade in sympathy with oil. Hence, a forward tightened oil market can only be constructive for natural gas despite domestic supply issues.

While other macro issues influencing energy markets are legion, perhaps the most influential for the US natural gas market is a subtle development, which has eluded the radar of many traders. Historically, despite the European Union, continental natural gas has stubbornly traded within individual national hubs. There has for years, been no central pricing point comparable to our own Henry Hub. Recently however, due largely to changes within the Asian gas market, things have changed.

The pricing benchmark for England has long been a virtual trading hub known as the National Basis Point, (NBP). Within the last year this virtual hub has slowly emerged as the European pricing point of record. This development was primarily due to changes within the Asian complex and the rise of LNG as an implied pricing arbiter between Europe and the US. It has been during this last year that LNG would offload in Europe or St. Charles, Louisiana depending upon whatever port offered the most advantageous price. This arbitration of LNG between Europe and the US had caused a steady narrowing of the pricing trend lines between Henry Hub and the NBP. Within the last six months, an actual pricing convergence has formed.

The reason for this convergence is simple. When Asian demand declined during the height of the recession, especially that of South Korea, demand for Western LNG decreased, which in turn led to the development of the European-US arbitrage. Since that time, Qatar, New Guinea and Australia have ramped up their output considerably and both New Guinea and Australia are in the process of strengthening their own LNG facilities. Further massive new Devonian and Mississippian shale deposits similar to our own have been found in western Australia. It is unlikely that, even with increased demand, Asian needs will alter current LNG shipping trends. Indeed, the new Eastern production metrics should only enhance the overall growth of LNG shipping, rendering LNG as a possible global pricing arbiter. Thus, we are now in the midst of witnessing a long awaited development in the natural gas market. Natural gas is finally on the verge of becoming a globalized commodity. This will have profound and lasting effects upon the natural gas market along the entire supply chain from production to market end pricing dynamics, as well as the specific valuations of various E&Ps.